How to restructure hospital-based home care
Legal architecture can change profitability
By John C. Gilliland II
Gilliland & Associates
Covington, KY
Have you noticed the number of hospital-based home health agencies that are being moved into corporations separate from the hospital? Have you questioned why they are being reorganized into separate entities or divisions for Medicare, private pay, and other operations?
What is going on here? Why are so many hospitals beginning to restructure their home care operations to be different than the traditional hospital department?
Background
During the late 1980s and early 1990s, many hospitals established their home care operations to take advantage of the Medicare "cost shift." By having a home care department, the hospital could shift some of its own overhead to the home health agency’s cost report and thereby gain reimbursement for hospital overhead that otherwise could not be obtained.
The magic of the Medicare cost shift by itself could add hundreds of thousands, if not millions, of dollars to the hospital’s bottom line. The easiest way to gain this cost shift was to have home care as a legal part of the hospital, i.e., a hospital department, rather than a separate legal entity. Making a "real" profit was not a major concern. The financial value of the home care operation arose from the Medicare cost shift.
Because of this, the bulk of the home care department’s income came from Medicare with, perhaps, some from Medicaid. Private pay and attendant care, if any, were typically a very small portion of the home care department’s income. Hospital-based home care was Medicare-oriented and other payer sources were not of huge concern. After gaining the cost shift, the principal goal for many hospitals’ home health departments was to ensure that home care would be available for the hospital’s Medicare patients, thereby assisting the hospital in staying within its own payment caps from Medicare by providing a post-acute transition.
Both the cost shift and assurance of home care for patients discharged from the hospital were easily achieved by having home care as a department of the hospital. In most cases, little thought was given to other organizational structures.
As a result, the typical organizational model for a hospital home health agency has been as a department of the hospital with all home care operations conducted in that one department. Within that one department were the Medicare, Medicaid, and private pay operations. In some cases, even hospice was included in the home care department.
Today, there can be many reasons for a hospital to look at restructuring its home care operation. Here are some common and compelling reasons that apply in most cases:
• The cost shift has ended.
As a practical matter, the Balanced Budget Act has ended the value of the cost shift. Without the cost shift, home care departments have often become a cost rather than a profit to the hospital. Furthermore, with the cost shift gone, the need for home care to be legally part of the hospital also has ended. As a result, there is more flexibility now in choosing an organizational structure than existed in the past.
• Onerous Medicare regulations.
A Medicare home health agency must comply with Medicare requirements, such as advanced directives and OASIS, for all its patients including those who are not Medicare beneficiaries. The regulations are not only cumbersome, they increase the cost of providing services to non-Medicare beneficiaries, and this has caused the operational structure to be re-evaluated.
For example, if a Medicare home health agency provides personal care attendant services, then Medicare applies the home health aide regulations to the attendants, allowing only a very narrow exception for attendant care providers under a Medicaid waiver program. If the personal care attendant services are provided through a separate entity, then freedom from the Medicare restrictions is possible.
• The threat of competition.
As a result of the Medicare cost shift ending, now hospital-based home care often is expected to be profitable in its own right or it will be discontinued. However, home health agencies that are not hospital-based are becoming very lean in their administrative and general costs and in their benefit programs in order to survive under the new Medicare prospective payment system. It is very hard for a hospital-based agency to act accordingly given the hospital’s policies concerning compensation, benefits, and management structure.
• The needs of different types of business.
Hospitals are coming to realize that hospitals, home health agencies, attendant care agencies, hospice, and durable medical equipment (DME) are very different businesses. Not only are reimbursement and government regulations for each different, but many other aspects of their operations can differ as well, such as clinical policies, pay practices, personnel policies, Occupational Safety and Health Administration requirements, infectious waste handling, and corporate compliance issues. Indeed, even the types of management required can differ significantly. Often the type of operational manager who can deal effectively with the issues confronting a Medicare home heath agency or hospice is very different than the entrepreneurial manager necessary for a successful private pay agency or DME company. Very simply, the policies, practices, and management styles appropriate for a hospital may not be appropriate for its home health-related operations.
Two basic models are emerging to restructure hospital-based home care:
1. The first model creates separate divisions within the hospital for the Medicare-certified home health agency, the private pay agency, and other home-care-related businesses. That is easily accomplished by management directive, and, if the divisions are operated separately, the need for the non-Medicare operations to comply with Medicare regulations can be avoided. That model does not, however, easily address the need for home care to be operated and managed differently than the hospital. As a practical matter, if home care remains a hospital department or departments, it can be very hard for hospital management to allow it to function differently than the hospital in terms of policies, compensation, benefits, and management structure.
2. The second model addresses the practical need for home care to be operated and have policies different from the hospital. This approach completely moves the home care operation into its own legal entity (or entities) separate and apart from the hospital but subject to hospital or hospital system control. The model makes it much easier for home care to adopt policies, compensation, and benefits relevant to the needs of a successful home care operation, and to react appropriately to the very competitive home care environment. Under this model, it also can be easier to separate Medicare, private duty, and other types of services to maximize reimbursement and eliminate Medicare regulatory controls over non-Medicare business.
Conclusion
As a hospital-based home health agency confronts changing reimbursement, new business opportunities, and an increasingly competitive environment for its services, it should consider whether or not its current legal structure is the best one to accomplish its goals. What was appropriate five or 10 years ago may not be today. A new structure for a hospital’s home care agency not only may help the home care operation survive, it can allow it to become a profit center which contributes significant funds to the total hospital enterprise.
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